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Economic growth stronger than expected in October

An oil sands facility is reflected in a tailings pond near Fort McMurray, Alta., on July 10, 2012. The oil sector helped Canada's economy expand more than expected in October. (Jeff McIntosh / THE CANADIAN PRESS)

Gains in manufacturing and the oil and gas sector kept Canada’s economy chugging along in October, according to the latest figures from Statistics Canada.

Better-than-expected growth in Canada came as the U.S. economy grew by 5 per cent in the third quarter – its fastest pace in 11 years.

Higher business and consumer spending south of the border should help Canada weather the storm of lower oil prices in 2015, economists said.

“Looking ahead, the recent plunge in oil prices is expected to weigh on economic growth over the near term,” Jonathan Bendiner, economist with TD Economics wrote in a research note on Tuesday.

“That said, Canada’s export sector is forecast to remain strong. A weaker loonie combined with sustained strength in U.S. demand” and cheaper energy costs should support manufacturing activity, he added.

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The positive reports sent stocks higher in Toronto on Tuesday. In New York, the Dow Jones Industrial Average sailed into record territory, with the blue-chip index crossing the 18,000-point mark.

Canada’s GDP increased by 0.3 per cent in October. That’s higher than the tepid 0.1 per cent rate that economists expected, and follows growth of 0.4 per cent for September.

“Manufacturing came in much stronger than prior readings would have suggested,” said Nick Exarhos, economist at CIBC World Markets. “Part of that is also the strength in resources. Sentiment around the resource sector hasn’t been great, so that was part of the surprise.”

CIBC World Markets now expects growth to come in close to 3 per cent for the final three months of 2014. That’s higher than the Bank of Canada’s forecast of 2.5 per cent.

The October result is “better news for right now, but going forward, we’re a bit less optimistic in terms of what the impact of the decline in energy prices will mean for 2015 as a whole,” Exarhos said.

For next year, CIBC World Markets believes the pace of growth will decline to 2.2 per cent, down from its previous estimate of 2.7 per cent. Though the price of crude oil is expected to rebound from current levels, this year’s declines will put a crimp in government revenues, as well business spending and investment, particularly in Western Canada, CIBC says.

“A weaker Canadian dollar supporting manufacturing should help some investment towards the tail end of the year and we’ll hopefully get some decent [growth], but it will be below what we originally forecast,” Exarhos said.

Prices for Brent crude oil, a benchmark for global prices, and WTI crude, its North American counterpart, currently trade near $61 (U.S.) per barrel and $57 (U.S.) per barrel, respectively. Prices have fallen by about 40 per cent this year as a glut of supply collided with lower demand from a faltering world economy.

Household and business spending drove the U.S. economy to an annualized growth rate of 5 per cent in the July to September period, according to figures released Tuesday by the U.S. Department of Commerce.

“Obviously 5 per cent growth is better than anyone has been anticipating. If that were to keep up, that’s more than enough to move back to a level that feels like normal,” said James Marple, senior economist at TD Economics.

The robust growth rate comes after the U.S. economy expanded by 4.6 per cent in the second quarter. However, it contracted by 2.9 per cent in the first three months of 2014.

Consumer spending grew by 3.2 per cent, it strongest pace this year, while business investment was also healthy, the figures showed.

The U.S. economy has added more than 200,000 jobs each month since February. Approximately, 321,000 jobs were created in November. Posted job openings are up to a 15-year high and so-called job quit rates are also on the rise, showing that people feel confident enough about the labour market to leave their jobs voluntarily, Marple said.

“Taken together, that leads us to believe we may finally get decent wage growth,” Marple said. “That’s been the missing ingredient to date, that we haven’t had any real increase in wages above the inflation rate.”

That wage growth would come just as consumers stand to financially benefit from cheaper gasoline at the pumps, Marple said.

All of that bodes well for the U.S. in 2015. TD Economics expects growth at 2.4 per cent for 2014, jumping to 3 per cent in 2015.

That, in turn, is a positive for Canada, Marple said. “Especially Ontario and central Canada, where our manufacturing sector stands to benefit from the combination of stronger U.S. demand and a lower Canadian dollar.”

On a national level, those gains will be muted by the impact of falling oil prices, he added.

The U.S.’s improving economic position stands in stark contrast to growing uncertainty in other parts of the world. Growth is gearing down in China and remains muted in Europe while unemployment remains high. Economists fear that Russia could slide into recession next year amid the collapsing price of oil and Western sanctions.

“I would say we have weak economic prospects in much of the rest of the world,” Marple said.

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